"This environment is tailor-made for a long-term investment in gold"
Gold prices bounced back Monday from the three-month lows hit by Friday's mini-"flash crash," rising more than 1% to just under $1,290 before renewed optimism on a debt-ceiling deal tempered gains."Demand for gold is on the rise as it's not apparent anymore that the parties will reach an agreement before the deadline,"said Bart Melek of TD Securities. "We're seeing some quite good physical demand at these levels," agreed Bernard Sinat bullion refiner MKS (Switzerland) SA. "The U.S. is the main story, focusing on the developments around the shutdown. Prices will continue to be volatile."
If gold falls further on further signs that a debt-ceiling resolution is imminent, contrarian economist Marc Faber sees a solid buying opportunity. "Between around $1,200 and $1,250, it's getting into a buying range," he told Bloomberg. Faber thinks if the ceiling isn't raised by Oct. 17, the Fed will come to the rescue and finance the Treasury until a deal can be struck.
However, the debt debate is only a symptom of a greater problem, he noted. "The governments -- not only in the U.S. but in other countries as well -- have grown disproportionately large and that retards economic growth."
"Economic confidence is in free fall"
Indeed, Business Insider reported that "the fight in Washington is having real economic consequences. Economic confidence is in free fall. Over the last two days, Gallup's economic-confidence tracking poll has fallen from an already low -35 to -43. Already we've seen the largest drop sinceLehman, and it's continuing apace. Real damage is being done by this fight, even if there's no debt ceiling breach."
Goldman Sachs' chief economist, Jan Hatzius, agreed, forecasting Friday that the shutdown could bring fourth-quarter GDP down to 2%. International Monetary Fundchief Christine Lagarde sounded a much-gloomier note Sunday, warning of "massive disruption the world over" if the U.S. defaults. "We would be at risk of tipping, yet again, into recession."
"Doomsday" default scenarios
What's the worst that could happen if the U.S. defaults on its debt? CNBC's Jeff Cox compiled a worst-case-scenario list:
1. Depression and unemployment.
2. Dollar down, prices and rates up.
3. Down go your investments.
4. Social Security payments halt.
5. Banking operations freeze up.
6. Money market funds break.
7. Global markets walloped.
The U.S. HAS defaulted before
Though a default is unlikely, it's important to remember that it's not impossible. In fact, according to George Washington's Blog, the U.S. has defaulted several times in its history. Perhaps the most notable occasion to gold investors occurred on Aug. 15, 1971, when President Nixon"closed the gold window, refusing to let foreign central banks redeem their dollars for gold, facilitating the devaluation of the U.S dollar which had been fixed relative to gold for almost 30 years. While not strictly a default on a U.S. debt obligation, by closing the gold window the U.S. government abrogated a financial commitment it had made to the rest of the world at the Bretton Woods Conference in 1944 that set up the post-war monetary system."
Inflation's not here -- yet
With so many unknowns, the best defense remains diversification, argued Michael Cuggino, president of thePermanent Portfolio family of funds. Don't be lulled into complacency by the booming stock market.
"It's been a very good year for equities, a year where stocks have outperformed corporate earnings and economic performance," Cuggino noted. "That alone is a risk factor for stocks.
"We would advocate a diversified approach," he said, "combining safe-haven assets -- like precious metals, short-term government bonds, and high-grade corporate (debt) -- with more aggressive growth vehicles like equities, for a more balanced overall return.
"People say (gold) is no longer relevant, there's no inflation, there's no need for it," he said. "But I would argue the other way. I think that this environment is tailor-made for a long-term investment in gold. ...
"I do believe in the long-term that all this liquidity (created by the Federal Reserve's stimulus programs) is going to have to be mopped up, and I think that is going to produce this day of reckoning."
1970s bull suggests gold's run isn't over yet
And another veteran participant of the precious metals markets reminds us that just because gold is down now doesn't mean it's out. Silver-Investor.com's David Morganreflected on the gold boom of the 1970s in a recent interview:
"I recall in the first bull market -- I'm that old -- that we saw gold from its official fixed price unleashed in '71 move all the way up to $200 an ounce over time.
"Then under William Simon's time at the Treasury, it sold off substantially and moved down to just a cat's whisker over $100 an ounce. I remember the gnashing of teeth; people couldn't believe that gold had been at $200 an ounce and it's now at $100.
"A lot of people gave up and it took some time to work back to $200 and even then people thought, 'Well, it's a double top.' But [selling] was the wrong thing to have done because then it went from the $200 mark to $850 ... in a fairly short period of time."
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